The Proper Scope of Behavioural Law and Economics

Abstract

Behavioural law and economics applies the conceptual tools of behavioural economics to the analysis of legal problems and legal intervention. These models, and the experiments to test them, assume an institution-free state of nature. In modern societies, the law’s subjects never see this state of nature. However, a rich arrangement of informal and formal institutions creates generalised trust. If individuals are sufficiently confident that nothing too detrimental will happen, they are freed up to interact with strangers as if they were in a state of nature. This willingness dramatically reduces transaction cost and enables division of labour. If generalised trust can be assumed, simple economic models are appropriate, but they must be behavioural, since otherwise individuals would not want to run the risk of interaction.